Building a Portfolio

ESG Trends Worth Tracking in 2019

In a report published earlier this year, MSCI outlines five major environmental, social, and governance (ESG) trends it sees for 2019. “Underlying many of the 2019 themes are potentially overlooked costs and opportunities, and our 2019 ESG Trends to Watch have one thing in common,” the report’s authors write. “Acting today could make the difference tomorrow.”

Here’s a closer look at why these ESG trends are on investors’ radars this year.

1. Initiatives to Reduce Plastic Waste

Plastic waste has been a growing threat to the environment for years, but since China stopped importing of many types of plastic waste for recycling last year, companies and countries are faced with the task of dealing with the garbage they’re producing in other ways. Municipalities throughout the United States have taken to banning single-use plastic products such as straws and grocery bags.

The corporate world is taking note as well. The number of companies that mentioned plastic waste in their earnings calls in 2018 more than quadrupled, according to MSCI. More than 350 companies including Danone, Coca-Cola, and Unilever signed on last year to the New Plastics Economy, an initiative aimed at eliminating unnecessary plastic, recycling existing plastic, and redesigning products to make them more environmentally friendly.

2. Climate Risk Urgency

Even as many companies and governments plan for ways to mitigate the impact of climate change, they’re also starting to account for the potential that humans won’t be able to avoid its dangerous outcomes, according to MSCI. Investors in 2019 will likely start to prepare for these risks by evaluating the future of their long-term investments, while others are increasing their demands for fossil fuels companies to act. Since December 2017, the investor coalition Climate Action 100+ has received commitments from Shell, Glencore, and BP to make changes to meet the goals of the Paris Agreement.

A separate ESG investing trends report by Institutional Shareholder Services (ISS) also predicts stronger policy action in 2019 around climate change. The ISS report anticipates “another very busy year” when it comes to climate-related proxy ballots, though As You Sow, Proxy Impact, and the Sustainable Investment Institute’s joint Proxy Preview 2019 report says there are fewer climate-related proposals than there were in 2018.

3. Increased Regulation

Regulators will continue to shift their attention away from companies’ ESG practices to those of investors and asset managers. The subject of a 2018 Institutional Investor conference, many of these regulations focus on fiduciary obligations. Eight in 10 regulatory or quasi-regulatory measures proposed last year targeted institutional investors rather than issuers, the MSCI report notes.

That changing regulatory focus reflects the transition of ESG investments from niche to mainstream, according to ISS. Rule changes from the European Union, Japan, and Canada are creating basic standards and fiduciary obligations that investors will have to incorporate.

As data proliferates, it’s even more important for investors to know what data has a material impact on their holdings.

4. A Focus on Materiality

Data has grown in importance across all industries and sectors, and investors are benefiting from the increased availability of a wide variety of ESG information. Going forward, investors who can use that data to further their investment thesis will excel, the MSCI report’s authors suggest.

As data proliferates, it’s even more important for investors to know what data has a material impact on their holdings and what’s simply noise. “Digging beyond headline data can help show which ESG metrics matter most,” write the authors of a recent BlackRock paper on the subject. The materiality of certain factors depends on the industry; for example, the energy efficiency of a trucking company will have a greater material impact on its bottom line than the energy efficiency of a media company, for which cybersecurity and user privacy might be more material issues.

5. Increased Executive Accountability

Moving forward from the #MeToo moments and other corporate scandals of 2018, investors remain focused on the actions of company leaders. In today’s economy, a company’s reputation can make up a significant portion of its value—up to 38% of market capitalization, according to the 2018 Reputation Dividend report, which looks at companies on the Financial Times Stock Exchange indexes during 2017.

As a result, investors are looking for paths via corporate boards and proxy votes to a level of power that would allow them to oust those executives who have behaved problematically. That often starts with eliminating entrenched directors who may not have an incentive to act. For example, the California Public Employees’ Retirement System (CalPERS) announced that it would vote against any director sitting on a board for more than 12 years. “Additionally, there should be routine discussions as part of a rigorous evaluation and succession planning process surrounding director refreshment to ensure boards maintain the necessary mix of skills, diversity, and experience to meet strategic objectives,” the fund’s Governance & Sustainability Principles report states.

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